THIS BLOG RATES THE S&P 500 BUY/SELL/OR HOLD EACH DAY WITH 2-GOALS FOR LONG TERM INVESTMENTS: (1) PRESERVE CAPITAL (2) BEAT THE S&P 500.
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Monday, October 14, 2013

Debt Ceiling...PE From Various Viewpoints

DEBT CEILING (OVER THE WEEKEND) (CNN/Money)

"We…have decided as a Congress that we need to avoid
going over the debt limit, and we'll figure it out. And it will probably be a
relatively short-term solution," Sen. Rob Portman, R-Ohio said.”Story at…

“What goes up, must come down. Figure 2 is noteworthy for
highlighting the lofty start of the current secular bear. Now after almost
fourteen years, the market P/E is down, but only into the red zone. That level,
however, is not overvalued. It was overvalued in 2000 and at many points over
the past decade. There were not plausible economic and financial conditions to
justify P/E near 30, 40, and more.

Now, finally, the stock market is fairly-valued for
conditions of low inflation and low interest rates (assuming average long-term
economic growth in the future). But what about the future? If inflation remains
low and stable indefinitely, then this secular bear will remain in hibernation
until the inflation rate runs away in either direction.” For the full commentary see Crestmont Research via
dShort.com, Advisor Perspectives at…

Note that Crestmont Research says that the market is not
currently overvalued based on low inflation and interest rates.This is the standard approach of many analysts based on estimated
forward earnings applied within a context of PE’s versus other economic periods.This approach also used by Bob Brinker for valuation.

PE BASED ON SHILLER 10-YR METHODOLOGY – EXTREME HIGH
(Hussman Funds)

“…the current Shiller P/E (S&P 500 divided by the
10-year average of inflation-adjusted earnings) of 24.2 is closer to 65% above
its pre-bubble median. Despite the 10-year averaging, Shiller earnings – the
denominator of the Shiller P/E – are currently 6.4% of S&P 500 revenues,
compared to a pre-bubble norm of only about 5.4%. So contrary to the assertion
that Shiller earnings are somehow understated due to the brief plunge in
earnings during the credit crisis, the opposite is actually true. If anything,
Shiller earnings have benefited from recently elevated margins, and the Shiller
P/E presently understates the extent of market overvaluation. On historically
normal profit margins, the Shiller P/E would be about 29 here. In any event, on
the basis of valuation measures that are actually well-correlated with
subsequent market returns, current valuations are now at or beyond the most
extreme points in a century
of market history, save for the final approach to the 2000 peak.

Of course, valuations exert far more effect on long-term
returns than on short-term outcomes, where a much larger set of considerations
generally apply. Unfortunately, on shorter horizons, the past few years have
been unusual. Market conditions that have historically resulted in awful losses
over the intermediate-term have instead been associated with positive returns.”
– John Hussman, PhD, Hussman Funds Weekly Market Commentary for 14 October
2013.

ARE FUTURE EARNINGS ESTIMATES RELIABLE?

Well, that’s the big question.John Hussman, Phd, Economics, says no,
they’re pumped up by the Fed and Federal deficits.Further, we have companies issuing earnings
warnings in record numbers as noted below:

FACTSET EARNINGS INSIGHT – (FactSet, 11 OCT 2013)

“Heading into the start of the peak weeks of the Q3 2013
earnings season, 110 companies in the index have issued EPS guidance for the
third quarter. Of these 110 companies, 91 have issued negative EPS guidance and
19 have issued positive EPS guidance.

If 91 is the final number of companies issuing negative
EPS guidance for the quarter, it will mark the highest number of companies
issuing negative EPS guidance since FactSet began tracking guidance data in
2006. The current record is 88, which was recorded in Q2 2013. If 19 is the
final number of companies issuing positive EPS guidance, it will mark the
lowest number of companies issuing positive EPS guidance for a quarter. The
current record is 22, which was also recorded in Q2 2013.The percentage of companies issuing negative
EPS guidance is 83% (91 out of 110). If
this is the final percentage for the quarter, it will mark the highest
percentage of companies issuing negative EPS guidance for a quarter since
FactSet began tracking the data in 2006.

With the start of the peak weeks of the Q3 earnings
season next week, the markets will likely shift focus from EPS guidance issued
for the third quarter to EPS guidance issued for the fourth quarter.”Excerpt from FactSet Earnings Insight at…

So it really is about earnings and the company earnings
guidance in the next several weeks.

MARKET REPORT
Monday, the S&P finished up 0.4% to 1710 (rounded) at the close.

VIX rose 2% to 16.07 as options boys worried.

MARKET INTERNALS (NYSE DATA)

Volume on the NYSE was 15% below the monthly average
Friday and 20% below that average on Monday.It is not unusual to see falling volumes after a low, since many investors aren't convinced. This time there is alos continued worry over the Debt talks in congress.The debt compromise isn’t a done deal yet.

Internals were again positive on the day and the 10-day
moving average of stocks advancing climbed to 51%. (A number below 50% for the
10-day average is generally bad news for the market.)

New-highs outpaced new-lows Friday, leaving the spread
(new-hi minus new-low) at +161 (it was +157 Friday).The 10-day moving average of change in the
spread is plus 13. That just
means that over the last 10-days, the spread has been getting better.

Market Internals are positive on the market for this
short term indicator. Short term things look good, so I’m very tempted to get
back in the markets, but the longer term NTSM system is still neutral and, as
noted below, has some issues.

NTSM

The overall long-term NTSM analysis remained HOLD at the
close.

SENTIMENT is getting quite high again and the VIX has not
come around to signal a buy either.VOLUME is neutral.PRICE (that
compares sizes of up moves vs. down moves) is the only positive indicator in
the bunch and it is the least reliable.High
sentiment can be the right call after a major bottom and everyone goes long,
but I’m not buying it here.The bottom
wasn’t much and it just doesn’t feel right. Charts are OK but have issues too.

The charts have indicated a slowdown of the rate of advance
in the S&P 500.

I am beginning to sound like a perma-bear, but I think
once the debt ceiling is resolved we will see a bounce followed by losses.

MY INVESTED POSITION

I remain about 20% invested in stocks as of 5 March (S&P 500
-1540).The NTSM system sold at
1575 on 16 April.(This is just another
reminder that I should follow the NTSM analysis and not act emotionally – I am
under-performing my own system by about 2%!)I have no problems leaving 20% or 30% invested.If the market is cut in half (worst case) I’d
only lose 10%-15% of my investments.It
also hedges the bet if I am wrong since I will have some invested if the market
goes up.No system is perfect.

So far in 2013, the NTSM system has not performed
well.NTSM has earned 10% vs. a buy and
hold system that would currently be up 24%.Why?

I’d say that’s the result of multiple QE by the FED for
which there is no precedent.

Followers

About Me

I am an engineer with a lifelong interest in "playing with numbers" so what could be more fun than trying to develop a system that beats the stock market? Well, lots of things, but I decided to do this anyway.
While I am not a finance-professional, or professional investor, I have developed some skills.
I competed in two CNBC Million Dollar Portfolio contests finishing in the top 4% in 2008 (34,320th of 800,000) and the top 0.1% (448th of 500,000) in 2009. More importantly, I managed to sell out of my retirement accounts at or near the top in 2000 and 2007 and bought close enough to the bottom that I didn’t lose too much sleep. (Even Bill Gates lost SOME sleep.)
I hope that my thoughts will help you achieve your investing goals. Please remember that my ideas are free and there may be times when my ideas are worth less than what you paid.